Money To Be Made In U.S. Oil

Protesters descended upon Washington, D.C., recently. They visited our nation’s control center to oppose construction of the Keystone XL Pipeline, from Alberta to the Gulf Coast.

At a higher level, Keystone protesters don’t want Canada to develop its oil sand resources in Alberta. It’s “dirty oil,” they say. Leave it in the ground is their view.

One way or another, whether the pipeline operators build Keystone XL or not, there’s money to be made on either side of the outcome. Let’s look into it. Read on…

Hey, Hey, Ho, Ho!

Basically, the protesters want to kill Keystone. And don’t discount the effect protesters can have. First, they have energy. Then, they make noise and deliver good optics to the media. That counts. So will they make a difference? We have to wait and see.
As for the details of the protests, I defer to reporter Steve Mufson of The Washington Post:

“The group rallied on a slice of the Mall,” wrote Mr. Mufson in his front-page Post article the other day, “just north of the Washington Monument before heading down Constitution Avenue, up 17th Street and past the White House chanting slogans such as ‘We are unstoppable, another world is possible’ and ‘Hey, hey, ho, ho, Keystone pipeline’s got to go.'”

However, according to Mr. Mufson, “The president wasn’t home… He was in Florida playing golf with Tiger Woods and Jim Crane, a Houston businessman who owns the Houston Astros as well as the residential compound where Obama is spending the holiday weekend.”

Whoops. Buzz-kill. Alas, the Keystoners staged a protest, but nobody was home — at least not the guy whose sentiments they wanted to reach out and touch.

Indeed, according to press accounts, President Obama flew to Florida on board Air Force One, the big, blue Boeing 747, four-engine jet airplane that runs on — you guessed it — jet fuel. Hey, hey, ho, ho, Air Force One has got to go. And it “goes” on refined petroleum. Double buzz-kill.

The Mufson account of the Keystone protest triggered deja vu deep within my mental recesses. That is, I recalled Saturday, Nov. 15, 1969, when a group called “Moratorium” organized 250,000 people to come to Washington and protest against the Vietnam War. (One of their slogans? “Hey, hey, ho, ho, the Vietnam War has got to go.” Seriously. That’s what they chanted. Some things don’t change.)

As war protesters marched, then-President Nixon — ever the commander in chief — remained at his post in the White House. There, he spent the afternoon watching a football game between Ohio State and Purdue. Ohio State won, 42-14.

The next day, Sunday, Nov. 16, as war protesters marched again, President Nixon went to Robert F. Kennedy Stadium. There, Nixon sat in the stands and became the first U.S. president to attend a regular season National Football League game while in office. Sadly, for the six or seven Redskins fans out there, the Washington team lost to the Dallas Cowboys, 41-28.

Eventually, Nixon ended the Vietnam War — for the U.S. side, at any rate. Nixon did what he did on his own time, and in his own way, protesters or no. Indeed, one could argue that the football games had more impact on Nixon’s conduct of the war than did the war protesters. I mean, at one point, Nixon went to the Redskins locker room and shook hands with the players. That’s more than he ever did with the war protesters.

Enough reminiscing. Let’s get back to the present. What will President Obama do with the Keystone XL? Will he cancel it and allow the protester community to believe that their collective voice actually matters? Or will Obama possibly approve Keystone XL, but make a big deal out of how the two-year delay, which he caused, has led to a better, safer pipeline?

Perhaps, eventually, President Obama will give Keystone the OK, but only if Canada and the U.S. Congress go along with some sort of “carbon tax.” My Canadian acquaintances are waiting for that one. Still, we’ll see. There’s no telling what decision might come from Obama’s BlackBerry.

Strategic Keystone

I’ve discussed Keystone XL on other occasions, such as here, and here. It’s a very important project. It’s strategic, in a profound way. Expanding the pipeline — or not — impacts America’s strong relationship with Canada, a longstanding ally.

Also, Keystone is a major issue for the U.S. in terms of long-term energy security. Will Canadian oil flow south from Alberta, toward the U.S. midcontinent? Will Canada’s energy economy remain tied up with the U.S. energy economy? Or will Canadian oil flow west to Pacific ports, and thence load into tanker ships bound for Asia — and all that such a turn of events implies?

Keystone XL boils down to basic American national interests. Keystone will help secure Canadian-sourced hydrocarbons for the U.S. economy, and do so well into the next century. Or not.

Security of oil supply will certainly matter, as time goes by, because most of the “traditional” oil-exporting nations of the world — most of the critical U.S. suppliers — have profound problems and risks associated with future oil exports. That is, oil fields are depleting in many states (Kuwait, Arab Emirates, et al.), and/or societies are in turmoil (Libya, Saudi Arabia, Nigeria, et al.).

By building Keystone XL, the U.S. will send a message to the rest of the world — or not, as I’ve mentioned. We’ll answer the question of whether the U.S. is serious about long-term energy security. Will the U.S. take steps to develop world-class energy resources here in North America? Or — not to put too fine a point on it — has U.S. national governance become fully divorced from energy reality?

Carry out that last line of thinking a bit more. Is the U.S. truly in free fall from great power status? If so, should the rest of the world continue to use the dollar as a reserve currency? Some people — important people — are already discussing the need for “gold trade notes” to use in international commerce. These are people with lots of gold and an antipathy toward the dollar and U.S. hegemony in the world. I just thought I’d mention it.

“Dirty” Oil?

Oil from Canada’s oil sands is, to be sure, energy intensive. Still, “dirty” — as the Keystone protesters label it — is the wrong word. Oil from oil sands is no more carbon-intensive than heavy oil from most places in the world — say, Venezuela, Russia, California.

When it comes to energy, we’re riding history’s timeline. It’s not your father’s world of energy. It’s not the 1970s or 1980s anymore. Heck, it’s not even the 1990s or early 2000s. The energy landscape has changed dramatically over the past decade. Large-scale energy development today requires putting lots more energy into the ground to get energy back out.

Specifically, oil sand development requires more of everything than in the past — more wells, more steel, more concrete, more equipment, more natural gas, more water, more labor, more money and capital. With more inputs of everything, we see lower “energy return on energy investment” (EROI) — more goes in, less goes out. It’s thermodynamics, but it’s not “dirty” oil.

At root, we’re dealing with energy economics. Oil sand development also requires higher prices to support all of the investment. If there were lots of “cheap” oil out there, every barrel of which was threatening to undermine the market, then few would dare to dig oil sand in Alberta.

We’re Going to Make Some Money

We’ll see how it all unfolds over time. One way or the other, however, we’re going to see a lot of money flow into energy development in the years to come.

Look at Shell Oil (RDS), for example. Shell delivered strong numbers in the fourth quarter of 2012. Cash flow was about $10 billion, with worldwide earnings up 15%, to $5.6 billion. For the full year 2012, Shell’s cash flow was $46 billion, and earnings were $27 billion. Shell has poured funds into exploration and development, while successfully reducing debt. And the shares pay a dividend yield of 5.3%.

Or consider Norwegian oil giant Statoil (STO). Here’s an oil major that puts its spending to good use. Statoil’s Q4 earnings were $2.7 billion, with fabulous news from the field in terms of operational performance. That is, Statoil delivered 110% reserve replacement — it found 110 barrels for every 100 barrels it produced, thus replacing its output and then some. Statoil shares pay a dividend yield of 3.5%.

Statoil management added about 1.5 billion barrels of oil-equivalent resources in 2012. The company forecasts 2-3% annual production growth through 2016 and targets 2.5 million barrels per day of output (oil equivalent — oil plus natgas) by 2020, up from the current level of 1.8 million barrels.

That said, we’re still dealing with the oil business. As I learned long ago working for the former Gulf Oil Co., the only easy day was yesterday. No one can rest on their laurels. What did you find this morning? What are you going to find this afternoon? The key is to figure out how to improve operating performance, deliver new discoveries and operational successes and truly move the needle.

We’re in the midst of sustained high oil prices. We live in a world of growing demand and constrained supply — Keystone protesters or no.

With high prices, these should be great times for oil companies. Still, the reality is that despite oil generating immense piles of cash, everyone has to work harder and harder to keep the pipelines flowing and the tankers filled. As I said at the beginning, there’s money to be made in all of this, whichever way the winds blow.

Byron King is the editor of Outstanding Investments, Byron King's Military-Tech Alert, and Real Wealth Trader. He is a Harvard-trained geologist who has traveled to every U.S. state and territory and six of the seven continents. He has conducted site visits to mineral deposits in 26 countries and deep-water oil fields in five oceans. This provides him with a unique perspective on the myriad of investment opportunities in energy and mineral exploration. He has been interviewed by dozens of major print and broadcast media outlets including The Financial Times, The Guardian, The Washington Post, MSN Money, MarketWatch, Fox Business News, and PBS Newshour.

King provided a good balanced point of view.
That said, all expectation has already been factored in.
That also deliver the message – to anticipate a burst
wealth from below earth surface is equivalent to a sea of vanity.

Mircea ( in Calgary )

Keystone or not, Alberta’s oil will NOT remain in the ground. Harper got busy hammering some deals with the Chinese, NEXEN was bought by China – and periodically we see movements toward building the western pipeline, towards Kitimat ( and Pacific markets ).
USA also pays $20.00 less than the international price for Alberta oil BUT all big money coming here is Wall Street generated.
Two thoughts to consider:
– how will behave Canadian economy playing with the other kids ( Pacific ) ?
– how long before Saskatchewan oilsands will come into play ?

Recent Articles

Despite slight upticks and subtle variations, the economy has been dragging its feet on a straight line slog since the end of the recession six years ago. After a lackluster rebound, is another financial tailspin pending? David Stockman has more...

“Market Death” -- ominous as it may sound, it’s the key to profiting in hard times, says Byron. Across the world, “too much” oil supply is moving about at a price below marginal cost of production. Market Death is the only thing that works to cut back supply and firm up prices…

A lot of people think about gold as a percentage of a country’s total reserves. They are surprised to learn that the United States has 70 percent of its reserves in gold. Meanwhile, China only has about 1 percent of its reserves in gold. Jim Rickards explains why the U.S. helps manipulate the price of gold for China’s benefit...